As the Department of Labor prepares to finalize its proposed regulation on qualified default investment alternatives (QDIAs) in 401(k) plans, the debate rages on as to whether stable value funds should be included as a default option.
DOL has proposed three QDIA options–life cycle funds, balanced funds, and managed accounts; the QDIAs are designed to allow employers to select default options for plan participants that are suitable for long-term investing. DOL has said it hopes to finalize the regulations by late June or early July.
While DOL has been steadfast in opposing a stable value option, some industry groups and members of Congress are urging DOL to change its mind. One idea being vetted now, says Peggy Howell, senior compliance analyst at The Principal Financial Group, “is to allow stable value as a default for a short period of time (for example, six months), after which the funds must be transferred to one of the three other options.” Another possibility would be to allow stable value but not give the same fiduciary protection as the other three options, she explains.
Because stable value funds are capital preservation funds, they are very conservative investments and do not reflect equity market rates, Howell says. “Some people prefer stable value as a default since they are relatively secure investments, normally have low expense ratios, and are liquid.” However, she notes, “the IRS does not think stable value is a good investment option over the long term since it inhibits asset growth that may be available using an investment option that includes equities.” Those who support a stable value investment argue that it’s a good option for some participants–for instance, older participants with few years for asset accumulation, Howell says.